Should you buy into New Zealand's first weed IPO?

Don Rowe for The Spinoff

Ten million dollars worth of stock in a medicinal cannabis company went on sale on Monday as Cannasouth aims to be the first company of its kind to list on the NZX. But should you buy in? Don Rowe talks to Simplicity managing director Sam Stubbs.

The country's first medicinal cannabis initial public offering (IPO) launched yesterday, giving Kiwi investors a chance to purchase stock in R&D firm Cannasouth ahead of the 2020 referendum.

Cannasouth, a Waikato-based biopharmaceutical company specialising in cannabis therapeutics, plans to raise a minimum of $5m from invited investors and a further $5m through an initial public offering, the NZX's first IPO in two years. Last year the company, which boasts six-year Federated Farmers CEO Conor English on its board, secured CMP Growth Capital Fund funding, the firm taking a 20 percent stake in the burgeoning company. Cannasouth plans to sell as many as 20 million shares.

The legal marijuana industry drew in more than $15b in investment worldwide last year, and the combined North American market is expected to exceed $24b in 2019.

But before you run in guns blazing, know this: some fund managers are skittish. At least four fund managers declined to go on the record about the Cannasouth offering, one telling The Spinoff it could put them offside with their older, more risk-averse clientele. According to Simplicity CEO Sam Stubbs, it's no surprise the big players are wary, given that listing a cannabis company in New Zealand is unprecedented, and the industry potentially volatile.

"I think that if you look at it as an investment opportunity with your KiwiSaver hat on, [fund managers] have got fiduciary responsibilities, so I'd be surprised if wholesale institutional managers would invest yet. That's no commentary on the business, it's just a very uncertain environment, so you need more certainty. But clearly it will appeal to people with high risk [appetite] or who love the product."

Cannasouth has licences to cultivate cannabis and manufacture extracts and products for research, and also to import dried leaf and viable seeds from places like the Netherlands. Those are two key selling points in what is a highly speculative offering.

"By importing a wide variety of cultivars, along with the dried flower from the Netherlands, we can further investigate the potential of both high CBD and THC varieties," chief executive Mark Lucas told Newstalk ZB in February.

Stubbs said while large fund managers may be playing it conservative when it comes to cannabis, offshore IPOs in the therapeutics industry have lead to huge earnings for early investors.

"Some investors will do it for genuine interest to see how to develops, and overseas there have been some small fortunes made in this area. We've seen a lot of money lost and a lot of money made."

Potential regulation in 2020 could also create a wealth of data on the impacts the legalisation of marijuana has on any number of social issues, Stubbs said. This would colour the regulatory environment and the ways in which companies could operate, and that susceptibility to political whims makes it a hard sell for fund managers.

"If you thought about marijuana as a product, I'd group it with alcohol in that it's an industry, but government can have a huge influence on how you sell the product. If it's a drug, which it is, then if it's successful it's likely to be heavily taxed. The big uncertainty is not only regulatory environment, but also tax."

Recreational substances are also underperforming worldwide, says Stubbs.

"We [at Simplicity] don't invest in tobacco or alcohol, because it's unethical but it's also an underperforming industry because fewer are smoking or drinking, so we're sitting out. I would think that we would look at [Cannasouth] from that perspective: quite possibly less or unchanged demand. The evidence says legalisation has little to no impact on demand.

"There have been early-stage dramatic IPOs on paper, but bear in mind those are only paper profits. Will they produce long term? We still don't know. As an investment we'd look at it that way. Ethically, half might say no, and will it be a good product?

Cannasouth is the third medicinal cannabis company to seek public funding, following Taranaki's Greenfern, who raised $1.8 million in crowdfunding earlier this year, and frontrunners Hikurangi, who crashed the Givealittle servers two nights running in 2018 on their way to $2m. Stubbs says crowdfunding is a more natural fit for such volatile and experimental investment products.

"IPOs are expensive and you have to be big to justify the cost, and there are ongoing regulatory requirements, so crowdfunding seems more logical. An IPO gives you respectability or maturity, but getting there is difficult and expensive, and most companies in the future that get to public listing will in my opinion go through crowdfunding or an incubator first.

"But if you love the product and the idea? You know, it's their choice. Good on them."

The Spinoff